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Nearly a year ago, The Supreme Court held in Law v. Siegel (In re Law), No. 12-5196, 571 U.S. ___ (March 4, 2014), that despite a debtor’s misdeeds, the Bankruptcy Court still has to follow the Bankruptcy Code and can’t just dispense its own sense of justice ad hoc. This same reasoning was recently applied in a bankruptcy court case in California, In re Arellano, 517 B.R. 228 (Bankr. S.D. Cal. 2014), the bankruptcy court there followed the Supreme Court’s logic in affirming that a bankruptcy trustee can’t object to a debtor’s amended claim of exemption based merely on a claim of “bad faith,” just because the debtor failed to disclose the asset in his original filing. Following the Law case, the bankruptcy court reasoned, any exception to a debtor’s claimed exemption must be based in law, not simply the bankruptcy court’s own sense of equitable considerations. This case prompted me to go back and cover the Law case.
In the Law case, the Supreme Court held that just because a Chapter 7 Bankruptcy debtor has committed some pretty serious misdeeds, that does not give the Bankruptcy Court the authority to “surcharge” his homestead exemption. Seriously, though, folks, don’t try this at home. Sometimes it takes really bad facts to get good law. The Chapter 7 bankruptcy debtor in this case—on appeal to the Supreme Court from the Ninth Circuit—was about as unsympathetic a character as one might imagine. The debtor, whose name was actually Law (no kidding) filed Chapter 7 bankruptcy in 2004. The only significant asset was debtor’s home in Hacienda Heights, California, valued at $363,348. The debtor claimed his California homestead exemption, protecting $75,000 of any equity in the property. The property was also encumbered by a valid note and first deed of trust in favor of Washington Mutual in the amount of $147,156.52. Debtor also claimed a second note and deed of trust (recorded in 1999) in favor of a “Lin’s Mortgage & Associates” in the amount of $156,929.04.
However, the bankruptcy court found that this second deed of trust was a fiction, manufactured by the debtor. The Chapter 7 trustee brought an adversary proceeding to invalidate the second deed of trust as fraudulent. Proving that truth is often stranger than fiction, two—count ’em, two—separate individuals claiming to be “Lily Lin,” (the named beneficiary of the fraudulent deed of trust) answered the bankruptcy trustee’s complaint. The first was an acquaintance of the debtor who denied ever lending the debtor the money that was supposedly secured by the deed of trust. This first Lily Lin cooperated with the bankruptcy trustee detailing how the debtor had attempted to involve her in the fraudulent deed of trust years before. Take this as a lesson: the debtor evidently planned his bankruptcy fraud for a long time, having recorded the fraudulent deed of trust in 1999—five years before he filed his Chapter 7 bankruptcy. It didn’t matter. Never, and I mean never, try to pull one over on the bankruptcy trustee or the Bankruptcy Court.
The second “Lily Lin” who answered the bankruptcy trustee’s complaint was purportedly a resident of China who spoke no English, but who nevertheless litigated the adversary proceeding for five years until, in 2009, the Bankruptcy Court found that no such person had ever lent the debtor any money for the fraudulent deed of trust. The court further found that it was in fact the debtor who likely “authored, signed, and filed” the pleadings on behalf of this purported second “Lily Lin.” The five years of bankruptcy litigation cost the Chapter 7 bankruptcy trustee over $500,000 in attorneys’ fees.
When the debtor’s fictitious straw person finally lost at trial, the Bankruptcy Court then imposed a “surcharge” against the debtor’s $75,000 homestead exemption in its entirety to defray the Chapter 7 trustee’s legal expenses. On appeal, the Ninth Circuit upheld this surcharge citing Latman v. Burdette, 366 F. 3d. 774 (2004), which had recognized the court’s authority to surcharge a statutory exemption among the court’s equitable powers where the debtor had engaged in fraudulent conduct.
Now, everyone can readily agree that this case presents a dishonest bankruptcy debtor for whom we can muster little sympathy. But the particularly unsavory debtor and his actions aren’t what make this case important and good for bankruptcy debtors generally. Like I said at the outset, sometimes it takes bad facts to result in good law. The technical issue before the Supreme Court was whether the bankruptcy court has the authority to take away a Chapter 7 bankruptcy debtor’s statutory exemptions, such as the California homestead exemption. The Ninth Circuit had held that bankruptcy courts do have such authority under either 11 U.S.C. §105(a), which grants the court the authority to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of” the Code, or the “inherent power” recognized in another Supreme Court case, Marrama v. Citizens Bank of Mass, 549 U.S. 365, 375-376 (2007), to “sanction ‘abusive litigation practices.’” The question before the Supreme Court was whether either of these gave the Bankruptcy Court the authority to ignore the debtor’s rightful statutory exemptions and “surcharge” the debtor’s homestead exemption.
The Ninth Circuit Court of Appeals ruled that the Bankruptcy Code plainly makes a debtor’s exemptions “not liable for payment of any administrative expense” 11 USC §522(k). Neither Bankruptcy Code §105(a) nor the “inherent power” to sanction recognized previously by the Supreme Court may contravene a specific provision of the Code. “The Bankruptcy Court thus violated §522’s express terms when it ordered that the $75,000 protected by [debtor’s] homestead exemption be made available to pay [the Trustee’s] attorney’s fees, an administrative expense.” Section 522(k) “does not give courts discretion to grant or withhold exemptions based on whatever considerations they deem appropriate.” The trustee could have timely objected to the claimed exemption but failed to do so. The debtor could also be denied a discharge under §727 or sanctioned under Rule 9011 or even prosecuted criminally, but the Bankruptcy Court has no authority to impose a “surcharge” on a claimed exemption.
The Law case has far reaching implications. At its core, it stands for the proposition that the bankruptcy court does not have the discretion to ignore the Bankruptcy Code or state law statutory exemptions available to every debtor, even unsavory ones.
Weighing your debt resolution options can be overwhelming. We are posting a 5-part blog series over the next month to help breakdown some of the most common and important considerations. Here are the topics we will be covering: What are the tax consequences? How the debt is settled – lump sum payment vs. structured payment […]
The post Debt Relief Blog Series: Determining Your Best Option. Part I: Tax Consequences appeared first on Acclaim Legal Services, PLLC.
If you ask any bankruptcy lawyer what they feel the best time is for filing bankruptcy, you’ll likely hear a resounding, “Now!” In truth, waiting around to file bankruptcy increases your risk for wage garnishments, lawsuits, auto repossession, and even foreclosure of you home. The New Year is here now, and there are many reasons […]
The post Reasons to File Bankruptcy at the Beginning of the New Year appeared first on Allmand Law Firm PLLC.
There is a common thread among potential bankruptcy clients who call seeking bankruptcy relief. They are most concerned about the cost involved in filing for bankruptcy and getting out of debt. I’m not referring to the court costs. Most potential clients are aware of the court cost because they have been asking this question over+ Read More
The post No Two Bankruptcy Lawyers Are The Same appeared first on David M. Siegel.
RadioShack Corp. is reportedly preparing to file for bankruptcy as early as February, according to a recent Wall Street Journal article.
Sources familiar with the situation spoke with the Wall Street Journal regarding the electronics chain’s recent financial situation. They confirmed a filing could come in the first week of next month.
Texas-based RadioShack is speaking with a private-equity firm that could potentially purchase its assets out of bankruptcy, according to the sources. However, these talks might not produce an agreement; sources stated RadioShack might attempt a traditional debt resolution method, such as bankruptcy.
The electronics chain has openly admitted it has been critically low on funds after posting losses in the last 11 quarters. RadioShack’s stock-market value has fallen to $50 million; on Wednesday, its shares dropped 13 percent to 41 cents each.
In December, RadioShack released a securities filing that warned it could be pushed into bankruptcy court if it was unable to raise new funds or receive assistance from lenders.
The securities filing reported RadioShack had $62.6 million as of November 1: $43.3 million in cash and $19.3 in borrowing accessibility.
Chief Executive Joe Magnacca unsuccessfully attempted to overhaul the company as a smartphone repair store. Almost three years of straight losses forced RadioShack to seek debt investors in order to stay in business.
RadioShack has been attempting to close 1,100 of its 5,000 stores since March 2014 but have failed to raise the funds to do so: only 175 stores have closed since the end of last October.
The 94-year-old chain began in the 1920s in Boston, first selling transistor radios and typewriters. The retailer became an American icon over the years but became irrelevant in recent years with the rise of technology and the internet.
As of late 2014, 24,000 people are employed by RadioShack.
Obtaining a discharge of student loans is a rare occurrence these days, and when the loans in question are exclusively Federal loans, the chances of discharging the debt are slim. The Nebraska bankruptcy court reinforced that reality in an opinion issued on January 8th. See In Re Harris, Adversary Case #14-4001.
A disturbing trend in student loan litigation continues in this case of a debtor filing a Pro Se complaint—that is, to file a complaint without any attorney representation. Most of the case law in student loan cases—and perhaps in consumer law in general—is frequently obtained by individuals who cannot afford to pay an attorney and so they opt to represent themselves. There would probably be a lot more meaningful case law in this area if attorneys would manage the litigation, but as of yet there is no effective device to pay for the expensive litigation cost involved in such cases, a very unfortunate reality.
The facts:
- Age: The debtor is 50 years old.
- Dependents: The debtor supports a 19 year old daughter with no disabilities.
- Income: The debtor earns $38,000 per year but had earned as much as $55,000 per year at a previous job.
- Physical Condition. No mention of any significant medical issues were mentioned.
- Marital Status: Single
- Federal Student Loan Balance: $32,643
- Private Student Loan Balance: $0
- Income-Based Repayment Options: 10-year repayment plan based on income was available since the debtor worked for a non-profit hospital organization.
The Law:
- Bankruptcy Code Section 523(a)(8) provides that a bankruptcy will not discharge any debt for student loans “unless excepting such a debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents
This litigation was doomed from the start. After going through a list of the reasonable expenses of the debtor, the court zeroed in on the key factor of the case: the debtor was eligible for a 10-year Income Based Repayment (“IBR”) since all the loans were Federal loans and she was employed by a nonprofit employer. Under the Public Service Loan Forgiveness Program (“PSLFP”), administered by the Department of Education, federal student loans may be forgiven after a debtor makes 120 qualifying payments while employed by a government or nonprofit employer. 34 C.F.R. § 685.219(b). Also, under the PSLFP program, any forgiven loan balance at the completion of the program is not subject to taxation—no 1099 Forgiveness of Debt form will be issued. Since the debtor was able to complete this program by age 60, the court declined to discharge her student loan debt.
It is important for debtors considering an application for a Hardship Discharge of student loans to classify their loans into two separate categories: (1) Federal Loans and (2) Private Loans. Since Federal loans have increasingly flexible payment terms available, it is rare for bankruptcy courts to discharge these obligations in the absence of significant long-term medical ailments suffered by the debtor or members of the debtor’s household. Private student loans, are more commonly discharged in bankruptcy proceedings, especially when lenders fail to offer debtors meaningful repayment options.
Image courtesy of Flickr and Thisisbossi.
If you’ve got private student loans, you’re more likely to fall behind on them than on your credit card debt.
Given the way private student loans are structured, that shouldn’t be a surprise. Balances on private student loans tend to be in tens of thousands of dollars, and the notes often carry interest rates approaching those of a standard Visa or MasterCard.
But with private student loans given out to people with little or no income and years of low earnings before they hit their financial stride, those debts are far more likely to fall into default.
Because private student loans are made between private lenders and borrowers, none of the repayment options available to federal student loan borrowers are applicable. Any refinance or consolidation is handled based on your credit and possible cosigners, rather than through the U.S. Department of Education.
That doesn’t means you don’t have options when it comes to handling your private student loans – only that you’ve got to take a more “do it yourself” approach. Taking these steps may help ease the burden.
Look Into Cosigner Release. Though not all private student loan companies offer it, find out if yours will allow you to get your guarantor off the loan. Companies that do permit a cosigner release will usually do so only if you’ve made timely payments on your loans for a period of time and meet other criteria.
Request A Lower Payment Or Interest Rate. If you’re falling behind on your private student loans, pick up the phone and let the lender know exactly what’s going on. Some lenders may reduce your payment amount or the interest rate, at least for a period of time.
If You Fall Behind, Pretend You’re Current. Once you fall behind on a private student loan, the lender will demand payment in full. assuming you’re not in a position to cut a big check to make it all go away, be sure to deposit some amount of money into a separate savings account each month. This way, you’ll have enough money to consider a settlement or lump-sum payment if one is offered to you.
Protect Your Rights Under Debt Collection Laws. If you fall behind on your private student loans, the lender will send your account to a collection agency. Under the Fair Debt Collection Practices Act as well as various state laws, debt collectors are limited in their ability to deal with you. Understanding these laws is an important factor in making sure that you’re not harassed or treated unfairly.
Read – And Save – Your Mail. Debt collection letters contain important information, and can tell you where you are in the collection process. This may include opportunities to settle your private student loan debt or otherwise get back into the lender’s good graces. Don’t let an opportunity slip by just because you didn’t read the letter.
Prepare To Defend A Lawsuit. Private student loan companies will often take you to court. Failure to defend the lawsuit can result in a judgment, which may in turn lead to wage garnishment and back account levies. Protecting your rights by defending the lawsuit will save you a lot of headache and financial distress.
Just because you’re over your head in private student loans doesn’t mean your life is ruined. By taking the steps outlined here, protecting your rights and approaching the situation with a clear head you’ll be in a better position to come out on top.
Timing is critical when filing a chapter 7 bankruptcy case. If you are wise, you can get out of debt and still be able to protect your much needed tax refund. The key is to file either several months before or several months after your tax refund is either expected or received. The problem is+ Read More
The post Get Out Of Debt And Protect Your Tax Refund appeared first on David M. Siegel.
This is a true story that happened last week for one of my chapter 13 bankruptcy clients. The client received a notice from the Illinois Secretary of State that his driver’s license was going to be suspended for failure to pay parking tickets by a specific date. He sought my advice on chapter 13 bankruptcy+ Read More
The post I filed Bankruptcy: My Driver’s License Is Still Suspended appeared first on David M. Siegel.
Midland Funding is a company that buys old credit card debts. But that’s just the tip of the iceberg.
If you go past due on a credit card debt, it’s going to be sold to another company. That’s how credit card companies make their money – by selling old debts that they can’t collect on their own.
The companies who buy old debts usually pay far less than face value for the account, so your $5,000 debt may be sold for as little as $500 depending on the exact nature of the account. Once the deal is done, the credit card company is out of the picture and only the debt buyer has the legal right to receive payment.
One of the major players in the debt buyer arena in Midland Funding, a unit of Encore Capital Group. Encore Capital, based in San Diego, is the largest debt buyer in the nation, buying enormous portfolios of charged-off debts each year in the hopes that it will be able to collect.
According to Midland’s website:
Midland Funding LLC is one of the nation’s biggest buyers of unpaid debt. Midland Funding LLC purchases accounts with an unpaid balance where consumers have gone at least 180 days without making a payment, or paid less than the minimum monthly payment.
Midland Funding LLC works with its affiliate, Midland Credit Management (MCM), to service accounts.
So there you have it – Midland Funding LLC buys the debts and hires Midland Credit Management to try to collect from you.
What Midland Buys When It Buys An Account
The problem isn’t that debts are sold to other companies, or that the new company hires someone else to collect from you. The issue is whether anyone really knows who owes what to whom.
When Midland buys old credit card debts, it wants to pay as little as possible because that will help boost its profit on each collected account. The credit card companies, however, want to get paid as much as possible so that they take less of a loss on their unpaid accounts.
To compromise, Midland (as well as just about any other debt buyer out there) buys nothing more than an electronic file of names, addresses and amounts due. The agreements covering these transactions allow Midland Funding to get more information, but it’s going to cost them more money – as much as $50 per account.
$50 isn’t a lot of money, but when you consider that Midland Funding is buying tens of thousands of accounts you can easily see how it can add up and cut into their bottom line.
The Midland Funding Business Model
Midland Credit Management will usually try to collect on a debt once Midland Funding buys the account, hoping that the consumer will voluntarily make a payment. Some people will pay the debt, others won’t.
If you don’t pay the debt when Midland Credit Management comes calling, then Midland Funding will take back the account and send it to a law firm. In California Midland’s primary outside law firm is Hunt & Henriques, though sometimes they keep the account in-house and use one of their own attorneys.
That happens a lot – in fact, during November 2014 alone Midland Funding and Midland Credit Management filed 193 collection cases in Los Angeles Superior Court alone.
In the vast majority of those cases (well over 90% of the time, in fact), Midland Funding gets a judgment for the entire balance they claim to be due.
Why Midland Funding Gets Judgments So Often
Most of the time, when someone is sued by Midland or another debt buyer, they fail to defend the case or show up in court.
With no opposition to the lawsuit, the judge grants a judgment in Midland’s favor. Once that judgment is issued, Midland can collect through wage garnishment, bank account levy, and other tactics.
That judgment, in California at least, can be renewed indefinitely. And once the judgment is issued, it’s difficult to get it lifted.
Why Defending A Midland Funding Lawsuit Makes More Sense
As I said, Midland Funding isn’t getting much in the way of documentation when it buys old debts. For example, it doesn’t get copies of the credit card application or statements.
In fact, Midland doesn’t get much proof at all when it comes to the debts it buys. Just enough to figure out who to sue and how much to claim as an amount due.
If you defend the credit card lawsuit when Midland Funding decides to sue, there’s a pretty good chance you’ll either get a very good settlement or win the case entirely. Because in the absence of any proof of their ownership of the debt or the amount due, Midland’s case falls apart.
States Have Noticed Midland’s Shoddy Practices
I’m not the only one who’s noticed how shoddy Midland is when it comes to filing credit card lawsuits with little or no proof.
In January 2015, New York State Attorney General Eric Schneiderman sued Encore (Midland’s parent company) over shoddy practices and forced Encore to pay a $675,000 penalty and vacate more than 4,500 court judgments against borrowers.
In 2012 the West Virginia Attorney General sued Encore “for using false affidavits when obtaining default judgments against West Virginia consumers and for failing to include information required by law when suing a consumer in magistrate or circuit court for an alleged debt.”
In 2011, the Minnesota Attorney General launched an inquiry into an Ohio class action against Encore for debt collection abuses after filing a lawsuit against Encore.
If You’re Contacted Or Sued By Midland …
It’s not hard to see why it makes sense to defend any credit card lawsuit that’s brought against you by Midland Funding, Midland Credit Management, or Encore. The company has a long history of playing fast and loose with the debt collection process, and there’s no reason to expect that your case would be any different.
Defending the lawsuit gives you the chance to force Midland to prove up the case, including answering the following questions:
- are you responsible for payment of the account?
- does Midland rightfully own the debt they claim they own?
- is the amount they claim to be due actually accurate?
- has the lawsuit been filed within the appropriate statute of limitations for collection of a debt?
It’s about making sure that you pay the proper people the proper amount of money, and not one dime more.
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